Stock-based Compensation

Summary of stock-based compensation expense

As of September 30, 2016, the 2005 Incentive Plan (as amended) has a total reserve of 30,169,000 shares of which 8,036,000 shares are available for issuance.

Stock-based compensation is based on the estimated fair value of awards, net of estimated forfeitures, and recognized over the requisite service period. Estimated forfeitures are based on historical experience at the time of grant and may be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The stock-based compensation related to all of our stock-based awards and employee stock purchases for the three and nine months ended September 30, 2016 and 2015 is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Cost of net revenues	$	995	$	984	$	2,888	$	2,929
Selling, general and administrative	10,797		11,564		31,474		30,106
Research and development	1,919		2,113		5,572		6,100
Total stock-based compensation	$	13,711	$	14,661	$	39,934	$	39,135

Options

Activity for the nine months ended September 30, 2016 under the stock option plans is set forth below (in thousands, except years and per share amounts):



	Stock Options Number of Shares Underlying Stock Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value

Outstanding as of December 31, 2015	496		$	15.14
Granted	—		—
Exercised	(224	)	14.69
Cancelled or expired	—		—
Outstanding as of September 30, 2016	272		$	15.52	1.25	$	21,248
Vested and expected to vest at September 30, 2016	272		$	15.52	1.25	$	21,248
Exercisable at September 30, 2016	272		$	15.52	1.25	$	21,248

There were no stock options granted during the nine months ended September 30, 2016 and 2015. All compensation costs relating to stock options have been recognized as of September 30, 2016.

Restricted Stock Units (“RSU”)

A summary of the RSU activity for the nine months ended September 30, 2016 is as follows (in thousands, except years):



	Number of Shares Underlying RSU		Weighted Average Grant Date Fair Value		Weighted Remaining Contractual Period	Aggregate Intrinsic Value
					(in years)
Nonvested as of December 31, 2015	2,079		$	49.45
Granted	683		66.64
Vested and released	(774	)	44.89
Forfeited	(120	)	52.86
Nonvested as of September 30, 2016	1,868		$	57.42	1.29	$	175,091

As of September 30, 2016, the total unamortized compensation cost related to RSU, net of estimated forfeitures, was $71.2 million, which we expect to recognize over a weighted average period of 2.2 years.

We have granted market-performance based restricted stock units (“MSU”) to our executive officers. Each MSU represents the right to one share of Align’s common stock and will be issued through our amended 2005 Incentive Plan. The actual number of MSU which will be eligible to vest will be based on the performance of Align’s stock price relative to the performance of the NASDAQ Composite Index over the vesting period, generally two to three years, up to 150% of the MSU initially granted.

The following table summarizes the MSU activity for the nine months ended September 30, 2016 (in thousands, except years):



	Number of Shares Underlying MSU		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Period	Aggregate Intrinsic Value
					(in years )
Nonvested as of December 31, 2015	611		$	51.41
Granted	219		55.77
Vested and released	(271	)	36.73
Forfeited	(39	)	56.41
Nonvested as of September 30, 2016	520		$	60.49	1.35	$	48,783

As of September 30, 2016, the total unamortized compensation costs related to the MSU, net of estimated forfeitures, was $13.4 million, which we expect to recognize over a weighted average period of 1.4 years.

Employee Stock Purchase Plan ("ESPP")

In May 2010, our stockholders approved the 2010 Employee Stock Purchase Plan ("2010 Purchase Plan") which will continue until terminated by either the Board of Directors or its administrator. The maximum number of shares available for purchase under the 2010 Purchase Plan is 2,400,000 shares. As of September 30, 2016, 937,000 shares remain available for purchase under the 2010 Purchase Plan.

The fair value of the option component of the 2010 Purchase Plan shares was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Expected term (in years)	1.2			1.2			1.2			1.2
Expected volatility	27.4		%	27.9		%	30.5		%	31.1		%
Risk-free interest rate	0.53		%	0.41		%	0.65		%	0.29		%
Expected dividends	—			—			—			—
Weighted average fair value at grant date	$	24.44		$	17.10		$	22.23		$	16.19

As of September 30, 2016, the total unamortized compensation cost related to employee purchases was $1.2 million, which we expect to recognize over a weighted average period of 0.5 year.